US Treasury yields jump after Trump stokes trade war, inflation fears

  • On Thursday, President Donald Trump stated that the U.S. would be imposing new tariffs on aluminum and steel.
  • Fears of higher materials prices and foreign retaliation rejuvenated inflation fears, sending yields up Friday.

U.S. government debt yields rose Friday after President Donald Trump's tariff announcement sparked fear of a trade war and more robust inflation.

The yield on the benchmark 10-year Treasury note rose 6 basis points to 2.868 percent at 4:31 p.m. ET, while the yield on the 30-year Treasury bond was up 6 basis points at 3.143 percent. Bond yields move inversely to prices.

Fears of stronger inflation as a result of higher materials prices and foreign retaliation sent yields up across the board Friday. The United States is expected to set tariffs of 25 percent when it comes to steel and 10 percent for aluminum, which could emerge as soon as next week and put pressure on companies both domestically and internationally.

"Trade wars and tariffs are bearish for bonds because they raise inflation," said Kathy Jones, chief fixed income strategist for the Schwab Center for Financial Research. "Particularly when we look at steel and aluminum, they're a part of a lot of things we use: autos, beer cans — you name it."

"If [the tariffs] go through — and they're substantial — it'll be passed along to the consumer," she added. "Ultimately, tariffs tend to slow economic growth ... People are looking at it and saying if we get some versions of this and retaliation, it's just a lose-lose situation."

News of the tariffs was met with criticism from a number of leaders including European Commission President Jean-Claude Juncker, who stated that the move "can only aggravate matters." Some on Wall Street have argued that the taxes represent a message to China, seen by the Trump administration as an ever-growing economic rival.

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Yield
 
Change
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US 3-MO
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US 1-YR
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US 2-YR
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US 5-YR
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US 10-YR
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US 30-YR
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Larry McDonald, founder of the Bear Traps Report, believes top Chinese officials could retaliate against unfriendly tariffs by reducing purchases of U.S. debt in the coming years, even as the Treasury Department prepares for a swell in issuance. And that, in turn, could send yields even higher.

"They've got just under $1.2 trillion and their holdings have been drifting down ... China isn't going to sell Treasurys, but they could buy less," McDonald told CNBC. Currently, "the longer-term bonds, those bonds are like $13 to $15 billion per auction. Next year we're going to be up near $20 to $25 billion."

While trade war fears dominated Friday headlines, comments from the U.S. Federal Reserve earlier in the week also weighed on sentiment. Federal Reserve Chair Jerome Powell said the central bank could raise interest rates three or more times during the course of this year to prevent the U.S. economy from overheating.

"We've seen some data that in my case will add some confidence to my view that inflation is moving up to target," Powell told lawmakers on Tuesday. "We've also seen continued strength around the globe. And we've seen fiscal policy become more stimulative. So I think each of us is going to be taking the developments since the December meeting."